Two-Stage Contests with Budget Constraints: An Experimental Study

Journal of Mathematical Psychology, Vol. 49, pp. 320-338, 2005

19 Pages Posted: 16 Oct 2004 Last revised: 24 Feb 2008

See all articles by James E. Parco

James E. Parco

Colorado College

Wilfred Amaldoss

Duke University - Fuqua School of Business

Amnon Rapoport

University of Arizona - Eller College of Management

Abstract

We report the results of an experiment on two-stage contests with budget-constrained agents competing to win an exogenously determined prize. We study a class of two-stage contests where in stage 1 agents first compete within their own groups by expending resources, and in stage 2 the winners of each group compete with one another to win the prize by expending additional resources subject to the budget constraint. Winners in each stage are determined by Tullock's proportional contest success function. We present the subgame perfect equilibrium solution for this model, derive predictions for our experiment, and then test them experimentally. The equilibrium model is flatly rejected mostly due to over expenditure in stage 1. A descriptive model that extends the equilibrium solution by allowing for 1) non-pecuniary utility of winning and 2) misperception of the probability of winning better accounts for some but not all of the behavioral regularities. We then turn to an adaptive learning model that accounts for several features of the dynamics of play but still significantly under-predicts the stage 1 expenditures.

Keywords: Two-stage, rent-seeking, tournament, contest, EWA, experiment

JEL Classification: C72, C78, D81

Suggested Citation

Parco, Jim and Amaldoss, Wilfred and Rapoport, Amnon, Two-Stage Contests with Budget Constraints: An Experimental Study. Journal of Mathematical Psychology, Vol. 49, pp. 320-338, 2005. Available at SSRN: https://ssrn.com/abstract=605265 or http://dx.doi.org/10.2139/ssrn.605265

Jim Parco (Contact Author)

Colorado College ( email )

Department of Economics and Business
14 E. Cache la Poudre St.
Colorado Springs, CO 80903
United States
719-389-6416 (Phone)
719-389-6927 (Fax)

HOME PAGE: http://www.coloradocollege.edu/dept/EC/parco.asp

Wilfred Amaldoss

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States
919-660-1894 (Phone)

Amnon Rapoport

University of Arizona - Eller College of Management ( email )

McClelland Hall
P.O. Box 210108
Tucson, AZ 85721-0108
United States
520-621-9325 (Phone)
520-621-4171 (Fax)

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